Is “the Egyptian botagas story” running out of gas?

Submitted by Vladislav Vucetic
On Sun, 04/29/2012

Also available in: Français | العربية

Everyone in Egypt has a botagas story. If you walk the busy and pleasantly noisy Cairo streets, as I often do in the early evening during my visits, you pass scores of fast-food shops, cafés, and makeshift tea stands, their bluish botagas flames burning steadily in the fading light. I am sure their owners have many botagas stories to tell. Newspapers often run these stories as well, usually with a photo of a queue of people with mixed expressions – a few smiling faces leaving with heavy bottles and many more anxiously waiting to try their luck. My colleague Khaled tells his own story in the accompanying “botagas” blog and it also ends on an unhappy note: botagas is not easy to get nowadays. So, what is behind these unhappy botagas stories?

It is true, to paraphrase Khaled: an Egypt without adequate supplies of botagas today is a country in crisis. In the last few years, about 4.4 million tons of Liquefied Petroleum Gas, LPG (botagas’s technical name) – or more than 350 million 12.5-kg bottles – were sold in Egypt each year; this year the plan is for even more: 360 million bottles. That is lots of bottles, 25 of them on average a year for each family that uses LPG (just over 80% of families according to statistics). This is two to three times more than in most other LPG-using countries according to a recent World Bank study. With such a high dependency on LPG, a disruption in supply must be very painful for Egyptian families.

But Egypt is not an energy-poor country. It has enough oil and gas to meet its own demands and perhaps even export a bit. With the world moving away from fossil fuels toward renewable energy, Egypt’s supply potential gets even better: large wind, biomass and hydropower resources and practically unlimited solar energy. What’s the problem then?

During a recent World Bank energy team visit we sat with government officials to talk about it. They also had a botagas story to tell and theirs was not a happy one either. It goes like this: over 99 percent of LPG is officially sold to households at 2.5 Egyptian pounds a bottle ($1 is about 6 Egyptian pounds). The remaining 1% is sold to commercial establishments and industry for just over double the household price. These end-user prices, controlled by the government, have not changed for years even though the costs have increased enormously. Just two years ago, the cost of supplying LPG, which is mostly imported, was about 40 pounds a bottle, last year it increased to 50 pounds, and this year it is likely to exceed 60 pounds. So, the Ministry of Finance, which pays the difference between the costs and the selling price, had to pay from the budget about 13 billion (B-I-L-L-I-O-N) pounds for LPG two years ago, 17 billion pounds last year, and has provisioned for about 21 billion pounds in this year’s budget.

The subsidy bill gets even higher when other fuels are added, as they are all heavily subsidized as well. This year, it is expected that more than 70 million tons of various fuels will be consumed in Egypt at an expected cost in excess of 150 billion pounds, depending on the movements in international market prices of fuel and the exchange rate. But Egyptian consumers will pay only about one third of this cost. The rest, 100 billion pounds or more, will have to be paid by the government budget or, more precisely, by Egyptian taxpayers.

This is a huge burden on the budget, accounting for about 20% of total budget expenditures, more than health and education combined. It represents a subsidy of almost 6,000 pounds for each Egyptian family. Furthermore, fuel subsidies in the government budget have increased during recent years at a staggering pace, almost doubling in only two years: in Fiscal Year 2009/2010 they totaled “only” 54 billion pounds, in FY2010/2011 almost 80 billion, now over 100 billion pounds. And still, shortages persist, and there is a flourishing black market, which has created a host of other problems. This disturbing trend has forced policy makers to ponder the obvious question: how to put an end to this runaway situation?

It is not difficult to explain what is happening; it suffices to remind ourselves how consumers and producers respond to price signals – or lack of them. From the demand perspective, the low price encourages excess consumption and waste, as people – especially in the case of LPG, which is practically free if you can get a bottle at the official price – will buy everything that is offered at the subsidized price. At that price, people buy botagas even if they do not need it right away. They keep it for “bad days” or for a friend or relative or to sell at a profit in the “secondary market” (a euphemism for black market). Some, one hears, use it to heat swimming pools in the colder winter months, because it is so cheap to do at such a low price. From the supply side, the low selling price discourages a supplier from bringing the fuel to the market, especially if it is difficult to get the subsidy money paid in time – or at all, as often appears to be the case. Therefore, there is practically always a botagas shortage and a strong temptation by some to make it worse, as the price in the secondary market tends to increase with scarcity and the middlemen in control of supply can pocket the difference. Add to this smuggling of fuels abroad, corruption, favoritism, and other forms of illegal behavior and you have the Egyptian “botagas story”.

But as the saying goes, there is no such thing as a free lunch – and at the end of the day people collectively do pay the full price – even more when accounting for the secondary market markups and overconsumption. This is of course because budget money is people’s money which the government collects through taxes and other means, in part from future generations through borrowing. Wouldn’t it then be better if fuel is paid by those who actually use it rather than by taxpayers? Without prices signaling – “hey, this is how much this really costs” – people cannot make buying decisions that are both in their own best interests and, guided by the principles of a properly functioning market, also aligned with the overall interests of the society. So, there is a governance issue here as well: those who control the prices and keep them artificially low (the government in this case), are preventing people from having the full information they need to properly assess buying decisions or participate in the political debate on social programs and energy policies.

The huge disparity between the prices and the costs of fuels would perhaps be less problematic if the resulting subsidies were targeted to benefit the poor and the needy. But they are not. Fuel consumption increases proportionately with income: the more money one has, the more energy one consumes with larger houses, more air-conditioners and other appliances, more cars driven and gasoline consumed. The way fuel is subsidized in Egypt does not differentiate between those who are well-off and those less fortunate. As a result, a disproportionate share of the subsidies ends up in the wrong hands, benefiting the more affluent households. A study financed by the Energy Sector Management Assistance Program (ESMAP) and the World Bank, and managed jointly with the Government of Egypt, found that 37% of all energy subsidies were enjoyed by 20% of households with the highest incomes and only 11% of subsidies went to 20% of households with the lowest incomes. For some fuels these percentages are even further apart: 91% vs. 0.4% for gasoline; 66% vs. 2.6% for natural gas, and 26% vs. 13% for LPG. Only kerosene benefited the poor more.

Subsidizing everyone in a system where the richer and the well connected get even more is not social justice. Manipulating pricing signals is not good governance. There must be a better way to achieve both social protection and efficient and affordable energy consumption.

But what could it be in today’s Egypt? In my next blog I’ll offer some ideas. Please do share yours as well.